REPUBLISH: The Monday Report – 08 November 2021

This story features LINK ADMINISTRATION HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: LNK

By Greg Peel

This article has been amended due to confusion in the initial report between drug-makers Moderna and Merck — an oversight which has now been rectified. Apologies for the error.

Definitely not next year

The ASX200 followed Wall Street in opening to the upside on Friday but kicked on to a 50 point gain by late morning on the release of the RBA’s Statement on Monetary Policy.

Amidst strong speculation of a first rate hike being required in 2022 due to stubborn inflation, at Tuesday’s meeting last week the board did no more than suggest the first hike may come in late 2023 rather than in 2024. Friday’s Statement basically insisted there was no way there would be a rate hike in 2022.

The SoMP revealed the RBA’s trimmed mean inflation benchmark is forecast to be 2.25% at the end of 2022 and 2.5% by the end of 2023 – well within the target band.  Tuesday’s comments suggested that inflation being within their target band for the first time in seven years does not warrant raising rates.

The morning high for the ASX200 held up through lunch before typical Friday profit-taking took hold after a net positive week and traders squared up ahead of Friday night’s US jobs numbers.

The SoMP was good for defensive yield-payers. Telcos rose 1.7%, staples 1.1%, utilities 0.9% and property 0.7%.

The Aussie ten-year yield fell -6 points to 1.77%.

A mere 0.1% gain for the banks was actually a strong result given Westpac went ex-dividend and closed down -2.7%.

Energy dropped -0.6% on weak oil prices which switched back to being strong on Friday night. Strength in commodities outside the bulks, and help from an Aussie that’s dropped quickly from US75c to US74c, had materials up 0.6%.

Worst performer was technology (-1.6%) because Afterpay ((APT)) fell -5.5% because Square fell -5.5% on its earnings result. The ACCC has no problem, so it’s all green lights for the takeover. Except it won’t be completed until early next year.

Speaking of takeover bids, Link Administration ((LNK)) revealed it had received another one and jumped 8.6%. REA Group’s quarterly result was worth 5.6% and added to News Corp’s ((NWS)) result to a total 6.9%.

On the other side of the ledger, a broker downgrade for Clinuvel Pharmaceuticals ((CUV)) was worth -12.5% and a trading update from Virgin Money UK ((VUK)) was worth -11.3%.

A solid US jobs number on Friday night sent Wall Street onward ever upward and our futures closed up 22 point on Saturday morning. However, there’s been some news out of Washington since.

After ultimately agreeing to separate the bipartisan “real” infrastructure bill from Biden’s more ambitious social infrastructure bill, the Democrats finally managed to get something passed, without even needing its (diminished) majority in the House, as ten Republicans voted for the bipartisan bill originally raised in the Senate. So Wall Street has that to respond to tonight.

Good News Good

The US added 531,000 jobs in October compared to forecasts of 450,000. September’s result of 194,000 was revised up to 312,000 and August from 366,000 to 483,000. The official unemployment rate fell to 4.6% from 4.8%.

Fears of an extended US economic slowdown from the peak have eased.

But the sticking point is participation. Only 104,000 people joined the labour force in October leaving participation at a stubbornly low 61.6%, which it has remained at for the past year. It’s the lowest rate since the 1970s recession. The economy cannot grow without the workers to drive it.

But wage inflation can, with wages rising 0.4% in the month to 4.9% annual growth, which is the fastest pace since new tracking measures were adopted in 2006. Hours worked remained around an all-time high, as businesses have increased overtime to cope with the ongoing labour shortage.

Yet the Dow was up 358 points following the pre-market release and there was good news from elsewhere as well.

Pfizer announced its covid anti-viral pill, which has been tested on the most vulnerable, showed an 89% rate of hospitalisation prevention. Merck’s equivalent showed only 50%.

Hence Pfizer shares rose 10% and Merck fell -10% while vaccine rival Moderna fell -20%, but was already set for a fall having disappointed with its earnings result released in Thursday night’s aftermarket.

Such a pill could provide an extra boost for a recovering economy, if as soon as you feel a bit off you can pop one and only be mildly ill. This might be what’s needed to bring the covid-fearful back into the workforce.

But it also provides a boost for anit-vaxxers, and the vaccine hesitant, as it suggests a vaccine may not be necessary. And boosters may not be necessary for the vaccinated.

Pfizer might have shot itself in the foot.

The other interesting movement on Friday night was that of US bond yields. The ten-year fell -7 points to 1.45% when the text book says strong jobs growth means strong economy means rising yields.

The suggestion for the contradiction is so many are adamant yields must rise into the next year that they are all short, and were thus vulnerable to the Bank of England upsetting the applecart last week in not hiking rates as assumed. Rates fell in the UK, and in Europe, and thus in the US.

We also saw the Nasdaq underperforming on Friday night when the text book says lower yields are good for growth stocks.

Wall Street gave back some of the early gains by the close but all majors, and the Russell small cap, closed at new highs. The S&P500 is now up seven sessions in a row.

Commodities

That unexpected fall in bond yields was good for gold, while the oils finally reflected the decision by OPEC-plus last week not to lift production.

Aluminium was once the least volatile of the base metals but not currently, while iron ore continues to wallow.

The Aussie is steady at US$0.7403.

The SPI Overnight closed up 22 points or 0.3% on Saturday morning, ahead of the news out of Washington.

The Week Ahead

With jobs in the bag, the US now turns to inflation numbers, with the October PPI out on Wednesday and CPI on Thursday.

China also releases inflation numbers.

Locally we’ll see our jobs number on Thursday. Tomorrow’s NAB business confidence and Wednesday’s Westpac consumer confidence numbers should reflect the end of lockdowns and easing of restrictions and borders closures.

National Bank ((NAB)) reports earnings tomorrow along with James Hardie ((JHX)), while AusNet Services ((AST)), GrainCorp ((GNC)), Orica ((ORI)) and Xero ((XRO)) report earnings on Thursday.

Still a lot of AGMs to get through this week, which I’ll highlight daily.

Note that both ANZ Bank ((ANZ)) and Macquarie Group ((MQG)) go ex today, so the bank sector will look a bit sick from the open.

Note also that as of tomorrow, Wall Street and the SPI Overnight close at 8am Sydney time.

The Australian share market over the past thirty days…

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